36466 Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

11 15 U.S.C. 78s(b)(2).

12 In partially approving the proposal, the

Commission has considered the approved portion’s

impact on efficiency, competition, and capital

formation. Moreover, the pilot program, if fully

implemented, likely will provide the Commission

with data necessary to enable it to evaluate the

impact of the proposed PMM standards on the

Nasdaq market and market participants. 15 U.S.C.

78c(f).

13 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 17 CFR 240.11Ac1–4.

4 17 CFR 240.11Ac1–1.

5See Exchange Act Release No. 37619A

(September 6, 1997) 64 FR 48290 (September 12,

1996).

6See Exchange Act Release No. 38156 (January

10, 1997) 62 FR 2415 (January 16, 1997) (order

partially approving SR–NASD–96–43).

7 Id.

8The Actual Size Rule does not affect a market

maker’s obligation to display the full size of a

customer limit order. If a market maker is required

to display a customer limit order for 200 or more

shares, it must display a quote size reflecting the

size of the customer’s order, absent an exception

from the Limit Order Display Rule. Market makers

may display a greater quotation size if they so

choose or if required to do so by the Limit Order

Display Rule.

9See NASD Rule 4613(a)(2).

10See Exchange Act Release No. 39285 (October

29, 1997), 62 FR 59932 (November 5, 1997).

11See Exchange Act Release No. 39760 (March

16, 1998) 63 FR 13894 (March 23, 1998) (SR–

NASD–98–21).

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Exchange Act,11

that the portion of Amendment No. 4 to

the proposed rule change, SR–NASD–

98–26, that extends the suspension of

the current PMM standards to October

1, 1998, be and hereby is approved on

an accelerated basis.12

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17718 Filed 7–2–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40139; File No. SR–NASD–

97–26]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Notice of Filing and

Order Granting Accelerated Approval

to Amendment No. 5 Relating to an

Extension of the Pilot for the NASD’s

Rule Permitting Market Makers To

Display Their Actual Quotation Size

June 26, 1998.

I. Background

On June 25, 1998, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’), through its wholly-owned

subsidiary, The Nasdaq Stock Market,

Inc. (‘‘Nasdaq’’), filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) Amendment

No. 5 to a proposed rule change

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’),1 and Rule 19b–4

thereunder,2 to amend NASD Rule

4613(a)(1)(C), seeking to extend through

July 31, 1998, the pilot program in

which market makers may quote their

actual size (i.e., one normal unit of

trading) in 150 Nasdaq stocks (‘‘Actual

Size Rule’’).

The Commission is publishing this

notice to solicit comments from

interested persons and is approving

Amendment No. 5 on an accelerated

basis.

II. Proposed Rule Change

The NASD proposes to amend NASD

Rule 4613(a)(1)(C) to extend the Actual

Size Rule through July 31, 1998. The

text of the proposed rule change is as

follows. (Additions are italicized;

deletions are bracketed.)

* * * * *

4613. Character of Quotations

(a) Two-Sided Quotations

(1) No Change

(A)–(B) No Change

(C) As part of a pilot program

implemented by The Nasdaq Stock

Market, during the period January 20,

1997 through at least [June 30, 1998]

July 31, 1998, a registered market maker

in a security listed on the Nasdaq Stock

Market that became subject to

mandatory compliance with SEC Rule

11Ac1–4 on January 20, 1997 or

identified by Nasdaq as being otherwise

subject to the pilot program as expanded

and approved by the Commission must

display a quotation size for at least one

normal unit of trading (or a larger

multiple thereof) when it is not

displaying a limit order in compliance

with SEC Rule 11Ac1–4, provided,

however, that a registered market maker

may augment its displayed quotation

size to display limit orders priced at the

market maker’s quotation.

* * * * *

III. Discussion

On August 29, 1996, the Commission

promulgated a new rule, the Limit Order

Display Rule 3 and adopted amendments

to the Quote Rule,4 which together are

designed to enhance the quality of

published quotations for securities and

promote competition and pricing

efficiency in U.S. securities markets

(collectively, the ‘‘Order Handling

Rules’’).5 To facilitate implementation

of the Order Handling Rules and

accommodate changes in the Nasdaq

market that these rules brought about,

the Commission later approved a variety

of amendments to NASD Rules

concerning Nasdaq’s Small Order

Execution System (‘‘SOES’’) and the

SelectNet Service (‘‘SelectNet’’).6

In particular, the Commission

temporarily approved a pilot program 7

whereby Nasdaq market makers in the

first 50 stocks subject to the

Commission’s Order Handling Rules

were only required to display a

minimum quotation size of one normal

unit of trading when quoting solely for

their own proprietary accounts.8 For

non-pilot Nasdaq stocks, the minimum

quotations size requirements of 1,000,

500, or 200 shares remained the same.9

Although the first 50 stocks were

chosen to provide a broad cross section

of the most liquid Nasdaq stocks, on

October 29, 1997, the Commission

approved an NASD proposal to amend

NASD Rule 4613(a)(1)(C) to expand the

pilot program to 150 Nasdaq stocks. The

Commission also extended the pilot

until March 28, 1998.10 The additional

100 stocks were part of an enhanced

sample designed to better represent the

entire Nasdaq market. The Commission

approved the expansion in response to

comment letters suggesting that the first

50 stocks did not sufficiently represent

the Nasdaq market because all 20 of the

largest Nasdaq stocks were subject to the

100 share minimum. Thus, some

commenters suggested that it was

difficult to gauge the Actual Size Rule’s

effect on large Nasdaq stocks since there

were no sufficiently large non-pilot

stocks with which to compare those in

the pilot.

The NASD has concluded an analysis

of an expanded pilot, and on March 5,

1998, it filed with the Commission a

proposed rule change to apply

permanently the Actual Size Rule to all

Nasdaq Stocks.11 As part of that filing,

the NASD published a 127-page

economic study of the 150-stock pilot

(‘‘March 1998 Study’’).

In the March 1998 Study, the NASD

concluded that:

• The Actual Size Rule did not affect

the market quality—in terms of spreads,

volatility, depth, or liquidity—of pilot

stocks.

• The Actual Size Rule has not

altered the ability of investors to access

market maker capital. For pilot stocks,
Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices 36467

12 Id.

13 In approving this rule change, the Commission

has considered the proposed rule’s impact on

efficiency, competition, and capital formation. The

proposed rule change will provide the Commission

with additional time to review the public comments

before determining whether to expand the Actual

Size Rule to all Nasdaq stocks on a permanent basis.

Since the Commission believes that the data

discussed above indicates that the pilot has not

harmed the Nasdaq market thus far, the net effect

of approving the proposed rule change will be

positive. 15 U.S.C. 78c(f).

14 15 U.S.C. 78s(b)(2).

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 38706

(June 2, 1997), 62 FR 31468.

3Securities Exchange Act Release No. 38308

(February 19, 1997), 62 FR 8467 [File No. SR–

Amex–96–44]. The Chicago Board Options

Exchange has filed a proposed rule change to trade

similar products. Securities Exchange Act Release

No. 38342 (February 26, 1997), 62 FR 10098 [File

No. SR–CBOE–97–03].

4The SPDR trust was established to accumulate

and hold a portfolio of common stocks that is

intended to track the price performance and

dividend yield of a particular S&P index.

retail investors continued to have

substantial and reasonable access to

dealer capital via both SOES and marker

maker proprietary automatic execution

systems.

• There was no evidence of any

material difference in market quality of

pilot stocks and peer non-pilot stocks

during the market stress on October 27

and 28, 1997.

To provide the Commission with

sufficient time to review the public

comments before determining whether

to expand the Actual Size Rule to all

Nasdaq stocks on a permanent basis, the

NASD proposes to extend the current

150-stock pilot through July 31, 1998.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Exchange

Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–97–26 and should be

submitted by July 27, 1998.

V. Commission’s Findings and Order

Granting Accelerated Approval of

Amendment No. 5 to the Proposed Rule

Change

The Commission approved the Actual

Size Rule on a pilot basis so that its

effects could be assessed. In doing so,

the Commission stated that it believed

that a reduction in the quotation size

requirement could reduce the risks that

market makers must take, produce

accurate and informative quotations,

and encourage market makers to

maintain competitive prices even in the

changing market conditions resulting

from the Order Handling Rules.

As discussed above, the NASD has

produced an extensive economic

analysis of the pilot. The data appears

to suggest that the pilot has not resulted

in harm to the Nasdaq market. Indeed,

as discussed above, the Actual Size Rule

appears to be an appropriate adjustment

of market making obligations in light of

the changing market dynamics resulting

from the Order Handling Rules.

Nevertheless, the pilot report is lengthy

and the Commission has received

hundreds of comment letters on both

the report and the NASD’s proposal to

adopt permanently the Actual Size

Rule.12 Extending the pilot through July

31, 1998, should provide the

Commission with sufficient time to

review the public comments before

determining whether to expand the

Actual Size Rule to all Nasdaq stocks on

a permanent basis.

For the reasons discussed above, the

Commission finds that the NASD’s

proposal is consistent with the

Exchange Act and the rules and

regulations thereunder applicable to a

national securities association and has

determined to approve the extension of

the pilot through July 31, 1998. The

Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of the filing in

the Federal Register to permit the

NASD to continue the pilot on an

uninterrupted basis for an additional

month.

Accordingly, the Commission believes

that the proposed rule change (SR–

NASD–97–26) is consistent with

Sections 15A(b)(6) and (b)(9) of the

Exchange Act 13 and

It is therefore ordered, pursuant to

Section 19(b)(2) of the Exchange Act,14

that the proposed rule change, SR–

NASD–97–26, be and hereby is

approved through July 31, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17784 Filed 7–2–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40132; File No. SR–OCC–

97–02]

Self-Regulatory Organizations; the

Options Clearing Corporation; Order

Granting Approval of a Proposed Rule

Change Regarding the Issuance,

Clearance, and Settlement of Options

on Unit Investment Trust Interests and

Investment Company Shares That Hold

Portfolios or Baskets of Common

Stock

June 25, 1998.

On February 21, 1997, The Options

Clearing Corporation (‘‘OCC’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’) a

proposed rule change (File No. SR–

OCC–97–02) pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’).1 On February 21, 1997,

May 14, 1997, and June 11, 1998, OCC

amended the proposed rule change.

Notice of the proposal was published in

the Federal Register on June 9, 1997.2

No comment letters were received. For

the reasons discussed below, the

Commission is approving the proposed

rule change.

I. Description

The rule change amends OCC’s

existing by-laws and rules to

accommodate the issuance, clearance,

and settlement of options on exchange

listed securities representing units of

beneficial interests in open-end unit

investment trusts (‘‘trust units’’) and in

open-end management investment

companies (‘‘fund shares’’) that hold

securities based on an index or a

portfolio of common stocks, such as

shares that have been proposed for

trading by the American Stock Exchange

(‘‘Amex’’).3 The Amex currently trades

trust units know as Portfolio Depository

Receipts (‘‘SPDRs’’) based on the

Standard & Poor’s (‘‘S&P’’) 500 index

and on the S&P MidCap 400 index.

SPDRs are trust units that represent

beneficial ownership in the SPDR trust 4